Rogers a victim of its own success

Rogers Communications Inc. is expected to show meagre growth across its business when it delivers fourth-quarter results on Wednesday morning.

MARK BLINCH/REUTERS/MARK BLINCH/REUTERS

SIMON AVERY

March 26, 2017February 19, 2012

The excitement generated late last year by the introduction of Apple Inc. 's newest iPhone and Google Inc. 's latest Android operating system isn't going to translate into a stellar quarter for Canada's biggest wireless provider.

Rogers Communications Inc. is expected to show meagre growth across its business when it delivers fourth-quarter results on Wednesday morning. And its wireless operations are likely to exhibit the effects of tougher competition, and expensive subsidies for smartphones, showing declining profitability and market share loss to competitors.

To some degree, Rogers has become a victim of its own success. While it has owned bragging rights as the country's No. 1 wireless player for years, the company now finds that its exposure to the mobile sector can actually drag on performance.

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The Toronto-based company's long-time lead in wireless technology over BCE Inc.'s Bell Canada and Telus Corp. helped it gain exclusive rights to Apple's iPhone in Canada for several years. The lead also enabled Rogers to generate more data revenue from customers than its rivals.

But today, Rogers' growth in average revenue per user (ARPU) from data appears to have topped out, while Bell and Telus continue to see theirs rise. Maher Yaghi, of Desjardins Securities, estimates that Rogers will report a 3.5 per cent decline in ARPU for the three months ended Dec. 31, while its top competitors posted increases between 1 per cent and 4 per cent.

Rogers' early success with the iPhone has given it the largest base of iPhone users in the country. When Apple releases a new version, Rogers reserves a substantial portion of its allotment for existing customers who want to upgrade. By prioritizing existing customers, Rogers fails to capitalize on some potential new accounts. In addition, analysts speculate that the company faced tight supply for the latest iPhone 4S last quarter.

Phillip Huang, of UBS Securities Canada Inc., forecasts that Rogers signed up only 20 per cent of the new postpaid customers in the market, compared with 43 per cent for Telus and 37 per cent for Bell. Dvai Ghose, of Canaccord Genuity Corp., estimates that Rogers added just 80,000 postpaid customers in the quarter, compared with 148,000 for Telus and 132,000 for Bell.

Making matters worse, Rogers is spending more to maintain and upgrade its wireless network than Bell and Telus, because the latter two formed a network sharing partnership in late 2009 to catch up to Rogers' technology.

Without the revenue growth Rogers used to generate, the company will have to borrow a leaf from the playbooks of Bell and Telus, boosting earnings growth by significantly cutting costs. While Rogers has already moved to trim expenses, it "needs to implement more cost-containment initiatives that can deliver material and recurring cost-reduction outcomes for the share price to improve materially from current levels," Mr. Yaghi wrote in a report.

Beyond wireless, Rogers' high-speed Internet, home phone and cable businesses face a maturing market, where new business increasingly comes from besting rivals. Analysts think cable could show healthy growth in the fourth quarter, thanks to a big promotional push designed to fend off the challenge of Internet protocol TV services from Bell and Telus. But this kind of growth cannot be sustained without hurting profitability, notes Mr. Yaghi.

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Rogers isn't expected to see much overall expansion this year. The Street is expecting management to announce guidance for growth in both revenue and earnings before interest, taxes, depreciation and amortization of about 2 per cent. Nevertheless, that should provide sufficient confidence for the company to boost the dividend by 10 per cent and announce another round of share buybacks.

But investors should prepare themselves for a relatively small buyback, perhaps 36 per cent less than the $1.1-billion spent last year, notes Mr. Ghose, who expects that Rogers' free cash flow will decline by about $400-million this year to $1.5-billion due to a jump in cash taxes.

Editor's note: A previous web version of this story incorrectly stated the percentage totals of postpaid customers held by Bell and Telus.

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